Are employee benefits taxable in Canada?

I've been involved with the financial services industry since 1991.  Over the past 25+ years, I have interacted with thousands of small business owners.  Here is a quick read to answer "are employee benefits taxable in Canada?"

Employee Benefits Defined

Employee benefits include various types of non-wage compensation provided to employees in addition to their normal wages and salaries. Generally, the purpose of employer benefits is to increase the economic security of staff members and in so doing improve worker retention. Examples of benefits include:

• Car allowance
• Paid personal days
• Wellness benefits such as a paid gym membership
• Insurance benefits such as disability and life insurance
• Health and dental benefits

Employee benefits are anything paid for by an employer and provided to an employee. A quick Google search defines a benefit as “an advantage or profit gained from something”.

Taxation of Benefits

By and large, all employer benefits are taxable. One notable exception are health and dental benefits. In Canada, health and dental benefits can be paid out tax-free to employees. This requires that a special arrangement be set up between the employer and the employee. The employer cannot simply pay an employee, call it a health or dental benefit, and expect it to be a tax-free. In order for the benefit to be tax-free, there must be a formal arrangement between the employer and the employee. When correctly set up, this arrangement is called a Private Health Services Plan or PHSP.

The eligibility of what can be reimbursed is extensive.

What is a Private Health Services Plan or PHSP

A PHSP is the formal name given by the Income Tax Act in Canada, to a health and dental plan set up between an employer and employee. A PHSP enables all eligible health and dental benefits to be reimbursed tax-free to employees. It is marketed and sold in different ways, such as employer sponsored health and dental insurance and commonly, a Health Spending Account (HSA).

In my next post, we’ll learn the ways an employer can pay out tax-free benefits to employees.

To learn more about adding a Health Spending Account into your employee benefits, download our FREE Beginner's Guide below: